Brothers keep gluten-free food business in Michigan

Brothers bought a product line from a failing maker of gluten-free products in Hillman

Launched Next Phase Enterprises Corp. last November

Planned to moved business to Chicago, but decided to stay in Michigan

Haq (left) and Shah Chaudary

Shah and Haq Chaudary had a plan last fall: Buy a product line from a failing maker of gluten-free products in Hillman, a small village east of Alpena, and move production to Chicago, where they lived, or to Iowa City, Iowa, where in 2016 they bought their first gluten-free food company, Wholesome Treats Inc., which sells bread and muffin mixes under the Breads From Anna brand.

Things didn't work out as planned.

The product line they bought when they launched Next Phase Enterprises Corp. last November was from a company called Mrs. Glee's Gluten Free Foods LLC, which used navy beans to make pasta and flour for cookies, muffins, bread, pancakes and other baked goods. The company was founded in 2010 in a nonprofit in Hillman called the Food Incubator Center, which had been designed to foster startup food-related companies in northeast Michigan.

But the incubator wasn't sustainable and neither was Mrs. Glee's. Its lender took the business over and notified its seven employees on Sept. 30 that the plant was being shut down immediately. Meanwhile, Shah and his brother were in a meeting in Chicago with one of Breads From Anna's suppliers. She told them about a supplier of hers in a small town in Michigan that had gone out of business. There might be an opportunity to buy product lines, inventory and machinery, she said. (Subsequently, they bought that woman's business, too.)

Before buying Wholesome Treats and becoming its president and CEO, Shah had been director of procurement for Little Lady Foods Inc. of Elk Grove Village in Illinois, a contract maker of frozen specialty pizza for retail and food-service companies. Before that he was a management consultant in supply-chain management for Accenture, the worldwide consulting firm.

"At Little Lady, I learned that gluten-free foods is a strong niche. There are a lot of people with celiac disease and the gluten-free segment is growing," he said.

So Shah was intrigued by the idea of growing through an affordable acquisition.

"We were in that meeting with our supplier on a Wednesday. On Thursday my brother and I drove all night and got here early Friday morning," said Shah. "We slept in the parking lot of the BP gas station for an hour and got here for our 8 a.m. meeting."

They met with a representative of the lender, made an offer and closed on the acquisition of machinery and inventory in mid-November. The building had been leased by Mrs. Glee's, and subsequently the Chaudarys bought two buildings totaling 12,000 square feet and the surrounding land, too.

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Shah is president and CEO of Next Phase, and Haq, who has been an executive in the food industry since 2000, including positions at San Leandro, Calif.-based La Brea Bakery; Rosemont, Ill.-based U.S. Foods Inc.; and Downers Grove, Ill.-based Sara Lee Corp., is chairman. Until recently, he was CEO of The Food Institute, a New Jersey-based provider of data and news to the food industry since 1918.

The brothers migrated to the U.S. from Pakistan in 1992, joining their father, Abdul Hamid Chaudary, who had come to the U.S. several years earlier. They went to high school in Burbank, Ill., and attended universities in Chicago.

"My brother and I are working 14 to 18 hours a day seven days a week to achieve our dreams," said Shah.

"We come from a small village in Pakistan, and we understand what even a small business can mean for a small community," said Haq.

After the close of the purchase in mid-November, the Chaudarys met with former employees and offered them their jobs back. The brothers had decided they want folks to be employed over the holidays. They'd keep the production going into January or so. "The plan was to shut it down after the holidays. We thought we'd run the business for two or three months, then move the equipment back to Chicago," said Shah.

"I was relieved to get my job back," said Barb Beegen, the plant manager. "There had been talk we were going to be shut down. There was talk every week, and then on Sept. 30, we got the word. We're shut down. And then Shah and Haq showed up. I got a call in November to come in, we want to talk to you. And I came in and they offered me the job of plant manager. Now, we're [growing] by leaps and bounds. I've had many jobs in my life, and this is my favorite."

By the time January rolled around, the move to Chicago was in doubt. "Our employees are just really good people. I don't have the words for it," said Shah. "My brother and I were used to the big city and how people treat you there. My brother and I said to each other, 'Did you notice how nice everyone is?'"

And it wasn't just employees happy to keep their jobs. Local officials and business leaders greeted the brothers warmly.

"The town elders were very helpful. The town was just excellent," said Shah. One of those elders was Dave Post, the village manager for more than 20 years. "Dave was extraordinarily helpful," said Shah.

Post said his village and the region were particularly hard hit by the Great Recession, with businesses closing and young people leaving for other areas. "And we have been hurt by big-box stores. They sucked the life out of small towns." A new business owner coming to town, getting a closed operation back on the tax rolls and saving a handful of jobs has been a big deal for the village, he said.

Like other small towns, Hillman has seen a recent revitalization. Post oversaw a streetscape improvement program, the downtown park got a makeover and high-speed internet is available throughout the village and even in a campsite adjacent to the park.

"When Shah and Haq came here, we got their water and sewer hooked up right away. We were talking back and forth, and they saw we are welcoming people. They saw they might have a better opportunity here, that we were a place where people wanted them. We're looking forward to watching them grow," said Post.

Jack Matthias owns the Thunder Bay Resort, an 18-hole public golf course, restaurant and lodging operation in Hillman. A school-board member and community activist, he and Post helped Next Phase network with local and state officials. So far, the Chaudarys have had preliminary discussions with the Michigan Economic Development Corp. about possible funding assistance to move Breads From Anna operations to Hillman from Chicago, and have begun talks with officials at Alpena Community College about setting up a training program in Hillman as Next Phase ramps up production and employment.

"I am guardedly optimistic about their plans to make Hillman a center for gluten-free food production," said Matthias, who has a daughter with celiac disease. "Montmorency County is one of the least populated counties in the state. It's a great place to live, but it's hard to find a good job. Shah and Haq are smart, they're well capitalized and they are well connected. The have shelf space at big retailers, which is important. Mrs. Glee's couldn't get that shelf space, which is why it went out of business."

Montmorency had a population of just 9,756 in the 2010 census. Of the seven smaller counties in the state, only one, Oscoda, is in the Lower Peninsula.

"People here won my heart. I could not take this company away from this town," said Shah. In August, he moved his family and three young children, ages 7, 4 and eight months to the Village of Hillman, which had a population of 701 at the last census. "That's my commitment to this place. The goal, now, is to make Hillman known as a mecca for gluten-free products. Our plans are big."

Haq remains in Illinois.

Currently, Next Phase's customers include Breads From Anna, the Legit Bread Co. of Arlington, Va., and Al Dente Pasta Co. in Ann Arbor, all makers of gluten-free products.

Shah said Breads From Anna will have revenue of more than $1 million this year and Next Phase will have revenue of about $500,000. Next Phase has bought some baking machinery that sits in crates on the factory floor, with the plan to launch a line of baked goods next year, including a variety of fruit breads, muffins and cookies to be sold under the Breads from Anna brand, which is sold in Meijer and Whole Foods stores.

"That will grow our revenue exponentially," he said.

Next Phase is also about to launch its own pastas made from navy beans under the Incredibean brand. "We want to promote Michigan navy beans," he said.

Thus far, the brothers have funded growth out of revenue, "but the time will come when we will need outside funding for growth," said Shah, who has begun talks with Marquette-based Northern Initiatives, a nonprofit that is a lender to small Michigan companies.

"We are not lenders or investors with Shah and Haq, yet. We've expressed an interest but they have yet to decide to utilize our funding," said Chris Wendel, a business coach with Northern initiatives who has vetted Next Phase.

"I am intrigued with their vision for making Hillman the gluten-free manufacturing capital of the Midwest and perhaps the U.S. If they can use locally produced beans and ag commodities from that part of the state, it becomes an even bigger deal. Their ability to purchase other gluten-free companies shows that they have some financial strength," he said.

Shah said the brothers are currently negotiating to buy two more small gluten-free food companies and consolidate at least some of their operations to Hillman.

"Our five-year plan is quite ambitious. We want to have a 50,000- to 100,000-square-foot facility with 200 to 300 or more employees," said Shah. "We plan to become a one-stop-shop for the gluten-free category. This will require a significant amount of capital investment to achieve."